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Economic Development

Survey: Can Management Consulting Help Tiny Firms Grow?

Predict the results of two recent development studies, conducted by IPA, one of the world's leading poverty research organizations.

An old and bad economist joke:

The Tooth Fairy and Santa Claus are walking down the street and see a $20 bill. Who reaches down to pick it up? The answer: Don’t be silly; there is no such thing as a $20 bill lying on the sidewalk.

What does this have to do with development? In the standard model of economics, firms generally work to maximize their profits—they adjust their pricing, enter new markets, access credit, hire expert advice as needed, and pick up all figuratively available $20 bills. 

Can firms grow without any infusion of financial capital and without any change to laws, underlying economic conditions, regulations, or export opportunities? If they are doing everything they can to maximize profits, then perhaps not.

Policies, both big ambitious and grassroots ones, often try to help firms grow. The microfinance community, for example, focuses on microenterprises, which are typically one or zero employee “firms.” Many believe that the key to increasing jobs lies with small and medium enterprises, or even larger firms. Others argue that firms are likely already operating at their optima, given their financial and legal constraints, so free money exists only through structural changes—in legal institutions, financing, export abilities, etc.

Two recent randomized trials by Innovations for Poverty Action in Ghana  (coauthored by Dean Karlan, Ryan Knight, and Chris Udry) and in Mexico (coauthored by Miriam Bruhn, Dean Karlan, and Antoinette Schoar) tested whether consulting services can help enterprises grow. In other words, with nothing more than advice, can small firms or microenterprises increase their profits? Or are they already optimizing, given their resources?

The answer is likely, “It depends.” But depends on what?

We’d like to know what you expect. First, let us tell you a bit more about the settings. 

In Accra, Ghana, 160 urban tailors and seamstresses with an average of 0 to 1 employees were randomly selected to be part of the study. A subset of the sample was chosen to receive customized consulting work from Ernst & Young. The consulting began with lessons on the importance of record keeping, then used the new records to help the tailors calculate their profit margin on each item they sew, and taught them how to calculate a monthly income statement. Lessons on customer service and managing employees were discussed throughout. Each available tailor was visited 1 to 4 times per month, with each visit lasting 30 minutes to 1 hour. To gain an understanding of the interaction between management experience and credit constraints, some of these firms also were given a one-time cash grant of $160—more than 80 percent of the average firm’s monthly revenues. The remaining tailors were given only the cash grant or nothing at all. The study thus attempted to test three distinct theories about what impedes the growth of small firms: Is it a lack of management skills, an inability to deploy these skills adequately, or simply credit constraints?

The study design in Mexico advertised for subsidized consulting services to be provided to micro-, small, and medium enterprises in a variety of sectors. A random subset of the firms that replied were chosen to be matched with a local consulting firm that advised the firms on a variety of business practices, from better record-keeping to marketing. On average, enterprises had 14 employees, and met with their consultants once a week for four hours over a one-year period. The enterprise owner and consulting firm decided jointly on the focus and scope of the consulting services. The study thus jointly tested theories of microenterprise development along two closely related dimensions: whether a lack of management skill is a limiting factor in the growth of enterprises (a bit larger than those in Ghana); and, in addition, whether this knowledge can be conveyed via the provision of short-term consulting services.

In the summer issue of SSIR, we will discuss the results of these two studies in more detail. But here, we’d like YOU to predict the results. We are doing this because people often have preconceptions about solving poverty issues, and rigorous evaluations often challenge conventional wisdom. It’s always easy to say, “I told you so” when there is no clear record of what the predictions were; ideally, people could register their predictions in advance.

With this experiment, we also are taking a baby step toward a more ambitious idea—to have a market in predicting the results of randomized trials. Such a market would serve two purposes. First, it would allow stakeholders to stake their claim (pun intended) on their predictions and be held to acclaim when they are right or to have their opinions challenged when they are wrong. Second, such a market could help donors, practitioners, and policymakers make decisions about poverty programs, by engaging the market’s collective wisdom. (Think www.intrade.com, but for results of social impact interventions.)

So here goes. To make this survey tractable, we have lumped together outcomes and asked for broad predictions. Please vote which of the four possibilities is the outcome of the Ghana and Mexico studies:

 

Create your free online surveys with SurveyMonkey, the world's leading questionnaire tool.

 

Among those who provide the correct answers, we will randomly (of course) choose two winners: winner #1 will receive a free copy of Dean’s book with Jacob Appel, More Than Good Intentions, and winner #2 will receive a free, one-year digital subscription to the Stanford Social Innovation Review.

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COMMENTS

  • BY Jim Mueller

    ON February 28, 2012 01:41 PM

    As a consultant who works with very small (1 employee and volunteers) to very large (universities and healthcare systems) organizations, and gives away a lot of volunteer time, I have found that size doesn’t matter.  It is the passion, commitment, and competence of the the people involved.

  • Dan Lozer's avatar

    BY Dan Lozer

    ON February 28, 2012 01:46 PM

    I would ask if the cash infusion in Ghana made a difference in how the consulting was perceived (Hawthorne effects in action if the consultant invests in you?)

  • BY rick davies

    ON February 28, 2012 02:58 PM

    Re your ambitions with this survey explained above, there is another potentially valuable use of the same process. A “pre-dissemination of results” survey would establish a baseline measure of public understanding in the field under investigation [with the caveat that the profile of the participating public would need to be made clear]. The proportion of that public correctly predicting the study results could be seen as a measure of the potential impact of the study. The smaller it is, the larger the potential impact. A follow survey of the same participants could easily then ask some thing like “Have these results been sufficient to change your mind on this issue?” [Fortunately your survey includes a request for participants’ email addresses].

    The same predict-disclose-compare process can also be used in face to face settings such as workshops designed to disseminate the findings of impact assessments, and has undoubtedly beeen used by others before today [including by myself with Proshika staff in Bangladesh, many years ago]

    So, please provide us with some analysis of the aggregate set of predictions, not just information on who the winner was.

  • BY Rhonda Staudt

    ON February 29, 2012 01:59 AM

    Having worked with people and organizations (Angola, Brazil, Germany, Liberia, USA) from 0-100 we can say confidently it depends on the person, the culture, the organization, the need and most importantly the want to grow and become more successful.  Some people and organizations really want to learn, grow and become more and some are quite simply happy to receive development $$$ and do nothing but wait for more free $$$. 

    In a short decade, we have come to understand that the people we serve do not always share our enthusiasm of having more and doing better.  Concisely, “sometimes we want more for people than they want for themselves”.

    I am confident on positive results from this survey.

  • BY Thien Nguyen-Trung

    ON February 29, 2012 10:21 AM

    Annie and Dean,

    I highly admire the work of IPO but I cannot help but at best mildly misunderstand the point and usefulness of this study.

    While the prediction market idea sounds good in theory, I am still not sure about the premise of this survey and asking for predictions in the case of consulting impact on SME growth.

    First, would it not seem logical that every company could use some management advice to a certain extent? As the other readers, especially Rhonda Staudt, commented: if we ASSUME already that a certain WILL to grow, a certain amount of passion, resilience, and other entrepreneurial virtues already exist within the clients to be consulted, and if we hold external environment factors constant, why would consulting (if quality of consulting is assumed reasonable) lead to negative effects (other than time wasted hanging out with consultants that could be used producing/selling things)?

    Second, does common sense not further suggest that it does not matter how much consulting you get if your environment is not conducive to succeed with your SME? Fine, so you help SME in African country X grow and sell more products. How can consulting be held accountable for the effects of an adverse environment created by poor governance, corruption, lack of funding, unfair competition, effects from global market demand contraction, macroeconomic factors? That seems unfair at best to me to the consultants putting in 208 pro-bono hours.

    Third, even if you come up with the prediction market, how useful will it be in this particular case? Even if donors only use the result as a supplement to make decisions, the use of such a tool should be that it reduces the amount of research/evaluation one has to do in the first place by being able to rely on the crowd’s collective experience. But with so many factors not being defined here, the donor herself cannot possibly go around their usual due diligence process (SME SWOT, external factors, blabla) and rely comfortably on some market… which seems to render the prediction market somewhat less useful, if that was your intended use for its results. But I agree on the first part, it’s nice to stake the claim first and then eat your words (and have that on the record) if things don’t turn out great - if anything, to put a few egos in place.

    Lastly, why is the question put as an “either-or” between funding capacity of SMEs to grow vs. strengthening institutions? Don’t we need both in most instances? The more important question would be if we can bring donors/funders, etc. together to split up and figure out who will do which part of the funding instead of convincing a majority to go one vs. the other way perhaps.

    Thus, I am somewhat uncomfortable about this particular study in that it seems to try to generalize from two cases when the issue of growth is lack of management skills, lack of deploying skills or lack of funding, when it seems from the start already that this will always depend on many things that cannot in return be generalized to a “top 5” list that seems to be one desired output of this effort.

    Leaving with your question:

    “Can firms grow without any infusion of financial capital and without any change to laws, underlying economic conditions, regulations, or export opportunities?”

    My answer: yes (if some of 200 factors come together)... to a certain extent. And no (if some of 200 factors come together).

    Again, thanks for clarifying if I am mistaken in my understanding behind the purpose of the study or the intended output to be generated.

    Respectfully,
    Thien Nguyen-Trung
    GoodGeneration.org

  • Hector J. Vela's avatar

    BY Hector J. Vela

    ON February 29, 2012 05:34 PM

    There is a current global downturn that is not helping much aggregate demand.  Besides, it is recorded -at least in the UK- that almost 90% of small business don’t survive by the end of the 10th year.

    On the other hand, the consultancy topics that were provided to the SMEs doesn’t seem to me of much relevance to make a significant impact on firms in neither contries…

    IMHO, there are other sifnificant factors -like innovation for a start- that need to be addressed in order to help the firms to survive and growth.  In other words, management skill matters, but not all matter the same.

    I almost can bet that consultancy on SMEs won’t have any significant impact for this experiment.

    Let’s see what happens…

  • BY Marilu Thomas

    ON March 1, 2012 09:16 PM

    As the Executive Director of a small non-profit that paid a fair amount of the budget last year to consultants to help launch a new enterprise, I would say that too much ‘consulting’ can result in undermining the confidence, experience and ‘gut’ of key staff. This can limit growth because the principals can become risk avoidant, believing the consultants to have all the answers, although new ventures entail stepping out into an unknown with some degree of confidence in oneself. I think the Ghana business would fare better because the investment would be experienced as a vote of confidence coupled with the freedom to learn from one’s own experience. Context is extremely important as is personal character—two things consultants may give short shift.

  • The problem with Ghana is the level of capital is too low for any increase to be directed to capital purchases.  Even if Ghana wins on a percentae basis, Nexico wins by being able to actually add productive captial assets to the enterprises.  That does not mean to dismiss the importance of improving results for those living closer to abject poverty—small results can make big differances in family welfare.

  • Dean and Annie's avatar

    BY Dean and Annie

    ON March 9, 2012 08:41 AM

    Thank you all for the above comments and interest in what we are doing. A few thoughts and answers to some of the queries:

    @Jim Mueller: Two thoughts. (1) Even if it were the case, as you say, that passion, commitment, and competence of organizations matter the most, policymakers and donors still need information on whether to create or expand programs as they are currently run, and (2) some would argue the opposite of what you are saying: the passionate and competent don’t need advice, so the value-added of a consultant is bigger on those who need help figuring things out… we’re not saying that is right, we’re just pointing out that smart people can argue the opposite.

    @Dan Lozer: Excellent question.  We will be addressing this in our academic paper, which will be on my Yale website when it’s finished.

    @rick davies: Yes we will—in the summer print edition of SSIR. Thanks for the feedback.

    @Rhonda Staudt: Yes, this is why we do the research we do.

    @Thien Nguyen-Trung:  We’ll try to go through your questions, although may not hit all of them:

    Why would negative results be found?
    Perhaps the advice was bad.  Perhaps as you said it simply took their time away from otherwise productive activities. Perhaps markets were efficient and they were already operating optimally. (These really aren’t three different reasons, but just different ways of saying the same thing.)

    How can consulting be held accountable for the effects of an adverse environment created by poor governance, corruption, lack of funding, unfair competition, effects from global market demand contraction, macroeconomic factors?
    It isn’t! This is why we do randomized trials. Both treatment (those who got consulting support) and control (those who did not get consulting support) experience the same environment. Naturally the answer may differ depending on the condition, and that is perhaps an important contextual factor to remember when extrapolating results from one area to try to set policy in another. In the summer issue you can compare the results of the study to your prior opinion.

    Third, even if you come up with the prediction market, how useful will it be in this particular case?
    We agree more is needed for a predictions market to be used for market intelligence and resource allocation.  We would never suggest going from a simple blog post and online survey all the way to allocating resources in one fell swoop! This was just our first baby step, throwing the idea out there with a simple exercise to go along with it….

    Lastly, why is the question put as an “either-or” between funding capacity of SMEs to grow vs. strengthening institutions? 
    To be clear, this wasn’t a study about strengthening institutions. This was a study that asked whether, given the institutions we have, mere advice can make a difference.  Thanks for all of your questions!

    @Hector Vela, Marilu, and David: Thanks for the thoughts. We look forward to hearing your thoughts on the results….  Yes, many factors influence outcomes, and this is true of most things. We are just testing the impact of consulting, holding everything else constant through the use of a randomized control trial. We’re glad to hear that you’re as interested in the results as we are!

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